Internet, in Pakistan, has come a long way since
its modest beginning at prohibitive rates in 1995. From a symbol of
luxury and a status carrying an hourly price tag of Rs 75 an hour
then, today the ISPs are engaged in a fierce "price war" to
lure users offering packages which offer less than one-tenth of the
price seven years ago.

On the other hand, with the privatization of the
Pakistan Telecommunication Company Limited (PTCL) drawing to a close
in June this year and the end of its monopoly over the fixed-line
telephone from January 1 next year an already aggressive IT sector of
Pakistan is readying itself to play a much more prominent role to turn
it into a full-fledged industry.

As is, the last 18 months have already witnessed a
range of pleasant developments in the IT industry pushed zealously by
Minister of Science and Technology, Dr Atta-ur-Rehman, of the
friendliest IT government that Pakistan ever had. The encouraging
signs of growth are visible all over, the most prominent indications
of which have been a drastic increase in number of internet users,
drastic reduction in internet bandwidth rates, expansion of universal
internet access from 30 cities to over 500 cities, towns and villages
across the country.

While much has changed much still remains to be
changed to exploit the tremendous potential for the growth of the IT
sector be it in software development and exports, human resources
development, networking, etc.

While the three foreign cellular telephone
operators have been the primarily beneficiary of the friendly
government policies other player such as the Internet Service
Providers (ISPs), Cable TV operators and software houses. Since ISPs
serve as the most important link between the internet users and the
telecommunication company, which in this case is PTCL, and since
internet is the very lifeblood of the IT industry this article will
deal specifically with the issues related to and status thereof of the
internet in the country.

The friendly and pro-investment policy pursued by
the Ministry of Science and Technology has attracted the global
attention which is evident from an in-depth report carried out by
Merrill Lynch & Company on the Pakistani IT industry. The report
titled "Investment Opportunities Abound" is appreciative of
the measures taken by the present government and call them encouraging
for the investment in the IT and Telecommunication sector. The report
issued recently by Khadim Ali Shah Bukhari & Co Ltd. says that the
"growth in Pakistan's telecom and IT industry has been unleashed
in the past year. Probably the most subtle growth has been that in
fixed-line telephony, where capacity grew just 0.20mn to 4.49mn.
However, digitization of fixed-line exchanges in the PSTN network was
on target at 94%. The icing on the cake was that Internet users in the
country grew by 250% as Internet access spread to 588 locations
throughout the country, as compared to only 29 locations, 17 months
ago. The question remains, is this growth sustainable?"

That certainly is an important question and though
the report offers its own answer — "after recording three to
four years of exponential increase, the growth is likely to subside to
30-40% over the next few years, until saturation sets in" — PAGE
analyses the situation based on the ground realities as at today.

Let's consider these basic facts about the IT and
Telecommunication industry of Pakistan — it reels from low
fixed-line telephone density, PC penetration, number of internet users
— due mainly to low per capita income. In addition to low telephone
density the costs related to internet use is also one of the reason
discouraging its use despite a tremendous reduction in rates during
last one year. PC use, and for that matter internet, remains primarily
restricted to corporate, education and commercial sectors and though
there are individual users as a group they contribute a much less
share.

"SHARED
RESOURCES: THE KOREAN MODEL"

PAGE talked to Javed Naushahi who is a member
of the Central Executive Council of the Computer Society of Pakistan
about the issues related to the internet. Javed feels that under the
prevalent circumstances it makes sense to follow the "shared
resources" model successfully adopted by South Korea.
"Despite the affluence South Korean has developed a culture of 'Baang'
or cyber cafes though with a per capita income of $ 8,000 the majority
of its population can well afford to buy a new PC. There are over
20,000 cyber cafes in South Korea which houses a population of 45
million which is one-third of Pakistan."

Compared to that, he said, "Pakistan which
reels from a much lower per capita income of $ 462 has less than 3,000
cyber cafes to cater to the internet-access-starved population of 140
million people. That makes it all the more important to adopt the
South Korean model of sharing the resources not only to tackle
problems related to low PC and internet penetration and associated
costs but for many other reasons.

"For instance, compare the Purchasing Power
Parity (PPP) in Pakistan with other countries. The average monthly
retail internet rate is $ 20 per month in the US, which has a high per
capita income of $ 20,000 and that too for unlimited access. Internet
rate in South Korea is almost the same. On the other hand, users in
Pakistan are paying highly un-proportionate internet prices, despite
tremendous reduction, compared to low per capita income and PPP. Those
using the premium internet service like Dedicated Dial-up Port (DDP)
costs much more — between $ 50-100 per month depending on city, the
ISP and the quality of service which it provides.

DEVELOPING
" DEMAND SIDE" INTERNET

Javed, who is also a member of the Task Force on
e-commerce, Government of Pakistan, stressed on the need to take
measures to help encourage and develop "demand" side of the
internet. "We have thus far been busy to address issues related
only to the "supply side". For instance, the government has
allocated Rs 1.5 billion for the creation of a Virtual IT University
but has allocated nothing for the development of e-commerce and
e-business infrastructure in the country which is the center of the
gravity acting as a catalyst in mobilizing IT activities in trade,
commerce and industry. At present, internet is primarily being used
for e-mail, surfing, chatting, etc. all of whom are part of the
"supply" side.

"In the developed countries internet is the
most convenient way of on-line shopping, reservations, banking, etc.,
to help reduce costs of transactions, personal convenience for paying
utility bills, credit cards, etc. Increasing the use of internet on
the "demand side" would automatically result in its use by
the common man.

"Thus far internet is not being used for
business and the government to help establish electronics links
between people and government, people and business, business and
government, government (departments) to government (departments), and
business to business. Using internet for these purposes would help
facilitate paperless trading and electronic cash culture for the
overall benefit of the economy.

"For instance, the government is printing over
230 million utility bills each year. This include bills issued by such
public sector power and telecommunication companies as WAPDA, PTCL,
KESC, etc. The accumulated billing of these utility bills issued by
these companies totals over Rs 400 billion, including Rs 150 billion
billing by WAPDA and Rs 60 billion billing by the PTCL. As the
currency in circulation is Rs 450 billion the situation puts a heavy
load on its circulation on the one hand and costs incurred on printing
new currency bills.

"The cash-based society needs to be
transformed into electronic money society as each utility bill costs
over 20 rupees from its printing to its delivery to the consumer.
Developing an electronic cash system facilitated by internet can help
reduce the cost of each bill by one-fourth to Rs 5 to help the
companies increase their profitability the benefit of which can be
passed of to the people.

"Other potential areas of "demand
side" internet use are shopping malls, issuance of Passport and
Identity cards, airline and hotel booking, on the line purchase,
tuition fee, personal income tax returns. However, necessary measures
should be taken to develop public infrastructure to facilitate easy
and affordable internet access and formation of a certification
authority to issue related digital certificates. All necessary legal
and security measures should be taken to protect the people from any
inherent misuse backed by a "payment gateway" to establish a
link between users and a bank for payments. Developing a paperless
electronic-cash culture will eradicate cash flow problems associated
with paper money and help save costs as well as a welcomed personal
convenience. It is imperative to make a beginning."

INTERNET
TARIFFS: ISPs, PTCL AND USERS

During last year-and-half, PTCL has slashed the
internet bandwidth tariff tremendously — from an extremely
prohibitive $ 100,000 to $ 3,000 Mb per second. The reduction of the
tariff by the PTCL to the ISPs has also resulted in reduction in
retail internet tariff so much so that at present there is a raging
price war for the share of the market between over 5 dozen ISPs
operating in the country. Internet packages offered by various ISPs
offer as low an hourly internet rates as Rs 5.

What has fueLled this sudden price war is not just
a marketing strategy to capture a significant portion of the market by
the ISPs to best benefit from the privatization of the PTCL this year
but also the incentives given by the government to the providers. For
instance, the ISPs now have to pay a much lower royalties 0.66 per
cent instead of 1.5 per cent. In addition, of the 62 ISPs operating in
the country there are many virtual ones, as well as smaller ones,
which have almost no or relatively less operational and overhead costs
to offer low internet prices.

However, it must be added that ISPs do not have any
problems affecting their quality, customer relations or financial
performance. Apart from the ongoing "price war" the ISPs,
many of which are much vocal to deplore the practise and yet find it
hard to remain detached from it, say that the approved but yet to be
announced decision to issue the internet licenses to the financial
sector by the government pose many challenges for them. This will take
one of our biggest group of customer from us and could result well in
creating a competition for us as these licenses can be used to
establish a parallel ISP infrastructure.

Salman Khan, who works for one of the top ISP as
vice president business development, that the decision to issue ISP
licenses to the financial sector is all the more worrying as
"financial sector has the money to manipulate. As is, cable
internet operators — who themselves are customers of the ISPs —
have become their very competitors. They are taking away a sizeable
number of existing customers and may take away many more potential
customers from the ISPs many of which have invested heavily to set up
the expensive infrastructure and incur high running costs."

SLOW
CONNECTIVITY AND SPEED

Asked about rampant slow internet connectivity he
said that "while the majority of the PCs used in the country are
equipped with standard 56 kb dial-up modems (today's dial-up modems
are much more faster — 2 Mb launched by DSL recently) the PTCL's
Public Service Telephone Network (PSTN) can facilitate a much smaller
load of 3,900-4,200 kb per second depending on traffic at any given
hour — 5pm-1 am being the peak hours."

Javed agreed that the "PTCL infrastructure is
capable of handling an average of no more than 1.2 kb per second thus
restricting the connectivity speed irrespective of and the size of
modem and processor — be it a P 1, P II, P III. The slower
connectivity has everything to do with the PTCL infrastructure and
also depends on the resources allocated by the ISPs — modems,
routers, RAM and other equipments and accessories. As long as the
front-end PC is equipped with reliable hard disc, cache memory and RAM
connectivity should be no problem to get connected speedily. The flow
of internet traffic is made up of two parts: The first comprises PTCL
"pipe" from a front-end PC to the ISP while the second
includes the international backbone from the ISP onwards. Usually the
majority of problems associated with connectivity are caused during
flow of data between a PC and an ISP primarily due to PTCL's narrow
"pipe" which can accommodate only so much traffic. While
problems also occur once the traffic reaches the ISP for forward flow
the fact that some 70 per cent of the ISPs are now owned and operated
by a new breed of professionally and financial sound professionals
makes it comparatively a less likely scenario. On the other hand, the
least problems occur in the final leg — the international
backbone."

The frequent internet users know that internet
connectivity and speed of the data flow is much faster during the day
than during the evening. This is due to the availability of much
greater bandwidth as internet is used only by office workers and
occasional house wives or children. However, the real internet traffic
starts after 5 pm and touches its peak till 1 am as people back from
work start getting on line. "This is the time to check the
quality of an ISP — those relying solely on the PTCL let their users
suffer more than those having an arrangement with an outside provider,
basically satellite for backbone or direct fibre optic. However, the
arrangement requires heavy costs which the most of the ISPs just
cannot afford."

PTCL:
THE ISP OF THE ISPs

PTCL is the internet service provider of the
internet service providers. It itself has arrangement with foreign
providers, the most prominent being STM-1 and has also signed an
agreement with FLAG (Fibre Linked Around Globe). The total internet
bandwidth of the PTCL is between 155-250 Mb depending on who you
choose to believe. According to Javed twenty months ago it used to be
a mere 22 Mb.

An ISP can buy a minimum of 256 kb bandwidth, only
STM-1 circuit, from the PTCL and many small and virtual ISPs are doing
just that. Many others are operating on 1 Mb bandwidth while only a
few quality ISPs offer a 2 Mb bandwidth service. A 256 Mb bandwidth
can serve an average of 120 users. PTCL reduced the bandwidth tariff
to $ 6,000 per 2 Mb per month or $ 3,000 one Mb per month from January
1 this year. However, Salman said, what the PTCL failed to mention
even in the fine print of its advertisements was that all new ISP
operators have to dig over $ 15,000 to start operations. "Many
new operators got the shock when they were told that they would have
to come up with $ 15,000 comprising first and the last month rent,
security deposit and installation charges. Allowing the financial
sector to buy bandwidth from the PTCL means immense loss of business
for the ISPs, particularly who have invested heavily in equipment,
human resources and high overheads.

"Despite heavy investments ISPs are not
provided any protection against the cable internet operators who are
playing havoc. There are many operators who are operating on 512 Kb
bandwidth, and there are few who are using as much as one MB
bandwidth, without any license whatsoever while many ISPs are still
operating on 256 kb. PTCL should not provide international bandwidth
of less than one Mb to anyone to better protect the ISPs which are
losing business.

"While PTCL and ISPs are both responsible for
the inconsistent connectivity and speed the former shares a much
bigger part of the blame because most of the time it is due to PTCL's
busy circuits and its unstable infrastructure. While PTCL has
international quality equipment, hardware and infrastructure the
weakness lies in implementation, utilization and production.

"The rampant connectivity and speed problems
faced by the internet users in Pakistan day-in and day-out is also
caused by PTCL having a single international bandwidth provider. It
should have a back-up provider- STM-1. PTCL, thus, has only one
backbone and does not itself have a reduncy. Under such circumstances
how could anyone expect any reduncy from the ISPs?"

While PTCL provides no reduncy on STM-1 there is no
restriction on the ISPs to buy reduncy on satellite. However, this is
an extremely expensive choice for the ISPs — half circuit costs $
30,000 per month while the demand note for the same costs a
prohibitive $ 40,000 — particularly in the absence of economies of
scale. There are three major under-ocean fibre optics lines across the
world. They are SMW-3, Oxygen and FLAG. Pakistan uses SMW-3 though
Oxygen which also passes near to Pakistan is less expensive. However,
we can not use it as authorities feel that it can be hacked to
compromise our security because it passes through India, which also
uses it.

"Though PTCL offers a reduncy package to the
ISPs at $ 9,300 per month more than 50 per cent more costly than its
regular package of $ 6,000 per month it provide only one-third of the
2 Mb bandwidth. This is too little a comfort at such a high price and
can only be made more attractive, even if it comes at an increased
tariff of say $ 10,000, if a full back-up is provided.

Salman said that though the internet bandwidth
tariff has been slashed drastically it still remains much too high in
Pakistan. The price of the 2 Mb bandwidth in Pakistan, i.e $ 6,000 per
month, can buy 34 Mb bandwidth in a developed country. He also said
that PTCL should ensure that the ISPs do not compromise on quality and
that it should not treat oranges and apples alike. "There should
be an accreditation policy for the ISPs just like the one for the IT
institutions and every Tom, Dick and Harry should not be allowed to
invest in ISP just because one has money.

INTERNET
SERVICE PROVIDERS ASSOCIATION OF PAKISTAN (ISPAK)

PAGE also talked to the secretary of
ISPAK, Air
Commodore (Rtd.) V. A, Abdi, an ISP pioneer when internet was
introduced here in 1995 and a "happy victim" of the frenzied
crowds gathered outside his ISP office which smashed the glassy
exterior. That was the time when internet rate was Rs 70 per hour.
Abdi stressed the need for increased use of internet-related services
and said that it is catching up because of development of many web
sites by various government departments. However, he expressed
concerns, that internet is not used for utility purposes in the
country.

Putting the number of ISP licenses issued at about
100, he said that there are as many as 62-65 ISPs operating in the
country, two-third or 42 of whom have a presence in Karachi. He said
that the ongoing price war poses grave danger for the ISPs many of
which will result in a number of closures ( he ruled out mergers as it
is against our national egotist character).

He said that the price war resulting in as low an
internet rate as Rs 5 hour hardly make any sense as the breakeven
level for the ISPs is a minimum 500 ports — users or single accounts
— which require at least 1 Mb internet bandwidth. "At any rate
a retail internet tariff of below Rs 7 per hour does not make any
economic sense at all and is akin to killing the future.

"PTCL network is old and rudimentary and needs
serious upgrading. On the other hand, the government should ensure
that it does not promote an eye-washed electronics culture but a real
electronics culture to facilitate on line banking, shopping, services,
tax payment facilities, etc.

"He said that PTCL is using three different
types of international bandwidths — under the ocean STM-1 and
satellite based Axim and Concert. In addition, it has signed an
agreement with FLAG, under the ocean fibre optic backbone.

Asked if ISPs would be able to survive by selling
same and singular product at the same price he said that "selling
only ISP service is just not enough to survive. The government should
take necessary measures to develop a networking to pay the utility
bills on the internet. A single utility bill costs as much as Rs 35
from the time of it is issued to the time it reaches the consumer.
Converting utility billing web-based will help save the utility
companies, all of whom are in the public sector, immense amount of
money the ultimate beneficiary of which will be the government.

"In Karachi alone some 1.4 million gas bills
and 1.7 million electricity bills are issued every month and it is
easy to see that a web-based bill payment system would help save
immense money, time and energy all of whom can be spent better
elsewhere. This would offer one good example of offering a value-added
service for the ISPs. The government should also made it mandatory for
the ISPs to connect district headquarters with the provincial
headquarters and ultimately to federal headquarters for easy flow of
information and data to help take timely decisions. The government
should act as an enabler and this project can work as a catalyst for
the ushering true electronic culture for the benefit of the
people."

PRICE
WAR: LET THE USERS REIGN

Is the "price war", which is benefiting a
large number of users, is really all that un-economical for the ISPs?
Let's do a little calculation. As mentioned above 2 Mb bandwidth can
support almost 1000 ports or users. The monthly tariff for 2 Mb
charged by PTCL at present is $ 6,000 per month or Rs 360,000 at
current exchange rate. Let's be generous and add another Rs 300,000
for administrative, marketing and running costs monthly. The total
costs incurred by an ISP to run a 2 Mb set-up thus comes to total
360,000 rupees per month. Let's assume that this particular ISP offers
a 24-hour unlimited access at an attractive monthly price of Rs 1,000
to 1,000 users that its 2 Mb bandwidth can accommodate, it generates a
revenue of Rs one billion per month.

Since all the ISPs are operating on much lesser
bandwidth than 2 Mb and since many of them have loaded their system
with much more users than the system can accommodate and since many of
them have low overheads the "price war" is certainly not
uneconomical. It, in reality, is a boon, even for the quality ISPs
which have invested heavily on their operations. After all, one should
not expect return on investment overnight like all other businesses as
long as one is generating a consistent revenue.

RELIABILITY

The Pakistan Software Houses Association (PASHA) is
the representative body of software developers. PAGE talked to
the president of PASHA, Hamza Matin, about the status of internet in
Pakistan. Matin said that the "responsibility of ensuring a
reliable internet service rests mainly with the PTCL rather than the
ISPs, which only serve as a middleman-buying the bandwidth from the
PTCL and selling it to the users. However, I am satisfied with the
overall quality of internet service in the country despite the 'last
mile' problem."

He said that PTCL no more sells 64 Kb and 128 Kb
bandwidth as previously. "It now sells a minimum of 256 Kb
bandwidth and has sent letters to the software houses — a majority
of which still comprise individually run and small entrepreneurs —
to upgrade their existing infrastructure. This requires heavy finances
which will be extremely hard for small software development houses
particularly at a time when the national economy is passing through a
recession."

He said that "internet tariff offered by the
PTCL is competitive in the region and the subsidized rates given to
the software houses is welcomed by the industry. However, electricity
rates are another matter as software houses are not allowed to get
subsidized power tariff. He said that the establishment of the first
IT Park in Karachi next month is a welcome sign indeed as it would
provide office spaces at subsidized rent, interconnectivity and power
charges. However, power subsidy should also be offered to the software
houses not located in the IT Park. The KESC offers no industrial
tariff to the software industry like many other industries which it
still chooses to treat as commercial consumers.

He lamented that incessant power breakdowns and
load-sheddings are costing the software houses millions in lost
productivity particularly to the small and medium size houses which
can not afford to buy costly generators. He said that the PTCL should
have at least another international provider to provide a reliable
internet connectivity and speed — the two most important
pre-requisites of the digital world of today where time means
everything."

He said that though the software companies are
allowed to buy their own bandwidth from the PTCL only a few of them
are doing it primarily due to prohibitive initial costs.

He said that the ISPs should take measures to start
providing value-added services. "They should develop specialized
portals, offer tele-business services, video conferencing facilities,
point-to-point set-up with international companies, on-line trading
system. In addition, the services should be backed by a
cost-effective, consistent, dependable and quality internet
infrastructure. As is, the absence of value-added services by the ISPs
are costing them heavily in terms of customer royalty as all of them
are selling a single and same service which only slightly differs in
term of price.

IN
CLOSING

According to an estimate — there are only
estimates as real figures related to IT industry in Pakistan are hard
to find — there about approximately one million internet accounts
and over 2.5 million users. There are 3 million e-mail accounts.
Almost the entire use of the internet is on the "supply
side" — educational institutions, surfing, e-mail, telephony,
business and corporate usage.

Javed Naushahi puts the total internet bandwidth
available with the PTCL at over 250 Mb and number of ISPs at about 90.
He said that the objective of all policies should aim to provide
internet access to educational institutions, homes, businesses and
government offices. This can be achieved by sharing the PC and the
communication resources to ensure equal opportunity of internet access
to all the people.

In addition, he added, it is imperative to put in
place legal and security pre-requisites to develop the "demand
side" of the internet. The legal pre-requisite comprise
legislation for acceptance of electronic transactions and their
admissibility in courts. The security features include establishing
Public Key infrastructure, Certification Authority, Digital
Certificate, Firewalls and secured websites with SSL, SET and other
features.

The key benefits of developing a "demand
side" internet are: low transaction cost, accessibility to all
the citizens, improved efficiency and competitiveness. In addition, it
will help in increased cash flow for the companies, documentation of
the economy, transparency, increased share of e-services in the GDP.
All these, in turn, will help create a conducive and enabling IT
environment to help attract foreign direct investment in the
Information and Communication Technology sector.

Much has changed for better during last 18 months.
Much, however, remains to be improved. Internet being the life-blood
of the IT should be given the top priority it deserves to ensure a
reliable, dependable, consistent and international quality service at
affordable prices to the end users. Nothing less will suffice or
acceptable.

MERRILL
LYNCH REPORT

The following is the excerpt from the Merrill Lynch
report a portion of which is mentioned in the cover story:

For a country like Pakistan, where the information
and communication technologies (ICTs) sector is only 3% of GDP,
relative to 50% in the US, there is still a long way to go.

For instance, though software houses have yet to
unleash their growth, in the light of the GOP's recent policies, we
are confident that over the next few years, they too will make their
presence felt.

The GOP's concerted efforts directed at encouraging
investment in the field of IT and telecom have opened vast avenues for
investment in the sector, with the potential for attractive returns.
At the same time, the licensing and regulatory procedures for the
sector have also been simplified.

"WHY
PAKISTAN?"

For foreigners, faced with the option of investing
in any one of the several regional countries, the important question
is "Why Pakistan?" The answer lies in the fact that not only
is the GoP taking steps to enhance demand by laying out enabling
infrastructure for private investors, but that also costs, in the
cases of certain facilities, for operators are the lowest in the
region, if not in the developing world. A case in point is the
reduction of bandwidth charges to only US$3,000 per Mb/s.

At the same time, the country is also paying due
attention to human resource development. Under the HR Action Plan, a
large pool of academically as well as technically skilled IT manpower
would be developed to meet the local and export needs. Consequently,
it has been decided that 60-70% of the budget assigned by the
government for the IT sector should go into the field of human
resource development.

Emerging Investment Avenues, according to
unofficial estimates, the sector has the potential to absorb
investment of up to US$15bn over the next 5 years. This includes
investments in projects with the potential for a attractive returns,
which have been tried and tested abroad, but are new or unheard of in
Pakistan.

For a country like Pakistan, whose IT sector is
still in its nascent stage, the sector has not been through the
"been there done that" cycle that the developed nations
have. At present, a little over 5 per cent of Pakistan's gross
domestic product (GDP) consists of the services sector out of which
2.5 per cent is the financial services sector, while 3 per cent is the
information and communication technologies (ICTs) sector. To measure
how far Pakistan can potentially travel, as a comparative benchmark
the USA's ICT sector alone is over 50% of it's GDP. Further, fixed
line penetration is only 2.3%, while the average for the Asia Pacific
region is estimated at 8.6 per cent. Consequently, there is
considerable room for entry for investors, in those segments in
Pakistan's IT and telecommunication sector, which have proven to yield
steady returns to investors elsewhere in the developed world.

Most has declared that it is actively pursuing a
project to place Pakistan's own satellite (PAKSAT) into orbit and
claim its parking space before April 2003.

Pakistan has a population of 140 million and a
fixed line penetration of only 2.3%, while annual unmet (registered)
demand is a further 0.2% per population or 275,000 lines. Further,
with the privatization of PTCL on the cards mid-year and the end of
its monopoly over fixed line telephony from 2003, existing players in
the industry will begin to rev up their operations, as the
increasingly deregulated sector makes the playing field level.